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Zero-Based Budgeting (ZBB): Getting Ahead By Cutting Back

OVERVIEW

What is zero based budgeting? It requires justifying each budget item's need or cost, while respecting strict policies and top-down targets set by the cost category owners. This level of detail allows for useful internal and external benchmarking.

ZBB is an open and transparent way of creating a budget, resulting in important insights into consumption. Budgeting from zero each year helps to remove unnecessary cost and create a detailed forecast. Savings can be earmarked and assigned to activities that ultimately boost growth.

KEY FINDINGS

A zero-based budgeting effort can fuel growth by removing waste and freeing up capital that can then be turned to more lucrative activities. At its core then, zero-based budgeting is about agility and getting companies to run in a more cost-efficient way to make them more competitive. Piecemeal approaches that focus on overhead and cost of goods sold is a common mistake that occurs during cost-cutting.

These efforts only scratch the surface and risk causing the company to lose valuable, differentiating capabilities. Companies need to focus on their core goals; funds that are not working toward those goals should be shifted into activities that drive growth. Indeed, without zero-based budgeting, it's likely the money needed to grow won’t be there.

RECOMMENDATIONS

Achieving profitable and sustainable growth through zero-based budgeting hinges on a few things: having an effective blend of cultural change, business process improvement and technology deployment—underpinned by a deep understanding of industry dynamics.

Companies
need to create better forensic visibility into spending, and then make savings sustainable through better accountability, process improvements and culture change. And most importantly, organizations should closely link spending reduction with their strategic growth plans.

Strategic cost reduction can only be successful if the savings are reinvested in areas of the company to drive growth, innovation, improved productivity, better customer experiences and so on.

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